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17 November 2011

Ron Paul's Foreign Aid Lies

M.S. strikes again for The Economist. This time s/he takes on Ron Paul's ludicrous statement, "Foreign aid is taking money from poor people in rich countries and giving it to rich people in poor countries."

Foreign aid is funded out of federal taxes. I'm not sure who Ron Paul would consider "poor", but the lower 40% of households in America pay no net federal income tax. They do pay social-insurance taxes, ie Social Security, Medicare and Medicaid, and a share of corporate taxes and federal excise taxes. Social-insurance taxes don't fund foreign aid; they fund social insurance. Any money that poor people in America might be contributing to the foreign-aid budget would come out of corporate and excise taxes. From 2000-2007, according to the Tax Policy Foundation, the bottom quintile of American households paid combined corporate and excise taxes of 2% to 2.8% of income. For the second quintile, the rate was actually lower, maxing out at 2%. Foreign aid accounted for 1.28% of the federal budget in 2009 and 1.5% in 2010. So the most a household in the bottom quintile might be understood to have contributed to foreign aid would be something like 1.5% of 2.8% of its earnings, or 0.042%. Mean household income for the bottom quintile in 2009 was $11,552. So you're talking about at most 0.042% of $11,552, which is $4.85. For the second-lowest quintile, you're talking 1.5% of 2% of an average income of $29,257, or $8.78. The proportion of America's foreign-aid budget that comes from poor people, rather than middle-class or rich people (all of whom, on a global scale, are extremely rich), is negligible, and it represents a negligible burden on those poor people's incomes.

But even this is overstating the case. The purpose of the earned income tax credit (EITC) is to make sure that poor people in America don't bear the burdens of the federal budget, especially those programmes that don't benefit them. At the lower end of the income spectrum, income taxes are a significant disincentive to work and tend to push people onto the welfare rolls; the EITC was introduced to compensate. That's the main reason why poor people pay negative federal income tax, and in fact people in the bottom quintile get more back from the EITC than they pay in income, corporate and excise taxes combined. Foreign aid is precisely the kind of federal budget burden that you don't want poor people to have to bear. The rational way to consider this is to think of the EITC as having exempted poor people from paying for foreign aid, among other programmes they shouldn't really be responsible for. But if Mr Paul thinks the EITC is insufficient to spare poor Americans from that burden, since they do still pay a share of corporate and excise taxes, then he is of course free to propose an additional refundable credit to poor people covering their share of corporate and excise taxes, presumably compensating by increasing the rates paid by rich people.* Somehow I don't think that reform is on Mr Paul's agenda.

I am waiting for a debate when the candidates will be challenged on their statements. It will probably never happen in my lifetime, but that would be nice.